Variant Partners: Lessons Learned from Cryptocurrency Application Points Programs

Original Title: “Lessons on Points Programs for Crypto Apps”

Author: Li Jin, Variant Fund

Points are sweeping across web3 applications, but what can they learn from web2 precedents?

It seems that overnight, points have sparked a crypto craze, becoming a new tool for app developers to enhance user retention and engagement.

Across the blockchain crypto space, founders are adding off-chain points programs to their applications, from Rainbow Wallet offering points for users using Ethereum, to Friend.tech building engagement loops around points, and the NFT marketplace Blur's new L2 Blast incentivizing users with Blast points to obtain transitional funding (which has exceeded 800 million TVL since November). On one hand, these points may become fungible tokens with real economic value in the future; on the other hand, users themselves have made this leap of faith. This trend is emerging as project teams seek broader market fit for crypto products and attract users during a bear market.

However, outside of cryptocurrency, points programs have long been a staple of consumer applications, from games to brand programs like Sephora Beauty Insider or Starbucks Rewards. At a higher level, points programs allow users to earn points by completing various activities and redeem or use those points in various ways, with the goal of incentivizing user participation.

Ten years ago, I developed a web2 mobile shopping app called Shopkick, which had 3 million monthly active users and partnered with national retailers like Macy's and Best Buy. The app rewarded users for certain behaviors, such as walking into physical retail stores, engaging with in-store products, and browsing the app. We established a program where users could earn in-app points through these activities, which could be redeemed for gift cards at various merchants.

Some insights I gained from this experience help guide web3 projects in developing points programs:

1. Any form of external incentive will change user behavior
2. Points programs change the type of users who choose to use the app
3. Maintaining the ambiguity of point value can provide flexibility

Let’s delve into each one.

1. User behavior changes in response to incentives in points programs

People will actively respond to incentives, and some unconscious activities arise due to our points systems. Behaviors such as going in and out of stores just to collect points spring up like mushrooms after rain—without external incentives, people would never do this. We addressed this by limiting the number of points users could earn from certain activities and establishing fraud detection measures.

Even if users are already interested in your product, the existence of points still alters their activities. Imagine waiting for discounts at a retailer that frequently marks down items, where these stores train their customers never to buy at full price. The existence of points can similarly train users to look for similar money-making opportunities. In the long run, the short-term growth of user activity may actually come at the expense of business health. These long-term adverse effects may take years to manifest and can be difficult to eliminate. A failed case is JCPenney's years of discounting and couponing with its "everyday low price" strategy.

Due to the influence of incentives, Shopkick also had to manage how we, as a startup, monetized and tracked metrics. Since our revenue came from retailers and brands interested in increasing engagement, understanding the value of user behavior was crucial. Incentives changed the value of walking into a store or engaging with a product, so it was essential to close the loop and track the relevant end KPIs, which directly related to the conversion and revenue uplift of our user base. Therefore, founders developing points programs should carefully establish key performance indicators, not just the incentivized actions.

2. Points programs change the type of users who choose to use the app

Points not only change user behavior to some extent but also actually alter the composition of the user base. Many developers hope to improve retention and engagement through points, but more fundamentally, the points system will change who decides to use your app in the first place. While we considered the needs of shopping enthusiasts when designing Shopkick, the existence of points attracted bargain hunters and extreme couponers—similar to "yield farmers" in real life. This also echoes research in psychology about how economic incentives can crowd out intrinsic motivation.

If the roles attracted by external incentives have reasons to stay (ongoing incentives or potential PMF), or if they continue to contribute to your specific business model, then this shift in user base is acceptable—think of credit card points or airline mileage points. In our case, we had a sustainable business model that could fund the ongoing existence of the points program. But any application that unsustainably offers rewards should proceed with caution, recognizing that when the subsidies end, that segment of users who were only interested in activity rewards will drop off, as they were never the target users of the core product.

3. Maintaining the ambiguity of point value can provide you with flexibility

If you want to tie points to some actual economic value, the best practice is to keep the numerical value ambiguous. This allows you to change the value of points at will to manage costs and test incentives while retaining user enjoyment. For example, the restaurant loyalty and rewards network Blackbird offers users FLY (off-chain tokens), but the specific value remains ambiguous, as they state in the app: "It can be redeemed for incredible things like free cocktails and premium access."

Directly stating that an action = X dollars, if the amount is too small, may reduce user enthusiasm. In the case of Shopkick, the points users earned could be converted into various gift card values, but the conversion effects varied for different rewards. When users walk into a store or perform other actions to earn points, they do not consider the nominal dollar value of their actions but rather the points, which feels more meaningful.

The Significance of Points Programs

I hope that in the crypto world, implementing points on-chain can provide interesting experiences for builders and users. While the points program I worked on at Shopkick was limited to our app's scope, using blockchain to track points could allow the application ecosystem to build around them. This could lead to fascinating new user experiences, such as in shopping environments where brands and retailers can understand who the most loyal shoppers are at other stores and target their offers accordingly, which has precedents in the airline industry—status match programs. For users, the added value of interoperable points across applications may also make it more attractive, reducing the pressure on each app developer to guide users to their own applications.

While I have outlined some important considerations for points programs, it is worth noting that I also see the real benefits of points programs. At Shopkick, we deployed points in a targeted manner to incentivize user engagement and change their behavior in the real world. With a small amount of funding, we could have a tremendous positive impact on user long-term retention and referrals. The details matter, and implementing an effective points program requires ongoing experimentation, iteration, economic value modeling, and rigorous KPI tracking.